Altria Group Inc: Why MO Stock Beat the Market On Tuesday

MO Stock Ups Share Increase on Takeover Windfall

Altria Group Inc (NYSE:MO) stock hovered near the flat line on Tuesday, which at first might not seem out of the ordinary. But in the proper context, which is that the S&P 500 had fallen 1.5% at the same time, MO stock’s minor gain is more notable.

The reason for Altria stock’s relative outperformance was that Altria increased its share buyback authorization by $2.0 billion, from $1.0 billion to $3.0 billion, upon completion of the Anheuser Busch Inbev SA (NYSE:BUD) takeover of SABmiller plc. Altria stock was a significant shareholder of SABmiller, and in the aftermath of the $103.0-billion merger between the two largest beer companies in the world, will retain a 9.6% stake in the combined entity. (Source: Altria Increases Buyback After $5.3 Billion Megabrew Payday, Bloomberg, October 11, 2016.)

Altria stock will receive $5.3 billion in pre-tax cash from the acquisition. The company has a very shareholder-friendly management team that is committed to rewarding investors with high dividends and buybacks. As such, it is no surprise to see Altria announce a significant addition to its repurchase plan.

MO Stock’s Cash Returns

In 2015, Altria spent $554.0 million to repurchase its own stock and $4.1 billion to pay dividends to shareholders. The reason for Altria’s impressive cash returns is because it generates very strong free cash flow, including $5.5 billion in free cash flow created just last year.

Tobacco companies enjoy a highly profitable business model, characterized by low capital expenditure requirements and excellent distribution. In addition, it also helps that cigarette companies sell an addictive product, which naturally leads to significant pricing power.

Altria’s free cash flow represented more than 20% of its total revenue last year, which is an impressive level of free cash flow generation as a percentage of sales. As a result, Altria stock has little problem raising its dividend each year. In fact, Altria has increased its dividend 50 times in the past 47 years. (Source: “Form 10-K,” Altria Group Inc, February 25, 2015.)

Altria maintains a clear dividend policy, which is to return approximately 80% of its adjusted earnings per share each year as dividends to shareholders. With this policy, there is enough left over to reinvest earnings back into the business and to pay down debt.

MO stock’s current yield of four percent is roughly twice the average dividend yield in the S&P 500.

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